10/6/2011 5:44 PM ET|
Will changes sink retirement plans?
A proposal that would cut or modify tax incentives for savings vehicles such as 401k's is raising concerns that contributions could suffer.
The government officials considering changes to how retirement savings vehicles such as 401k's work may want to note a survey this year by the Employee Benefit Research Institute.
Nearly 90% of respondents said it was either "very important" or "somewhat important" to deduct their retirement contributions from their work pay, with one in four of these full-time workers saying they would reduce -- or stop -- their contributions if the ability to deduct them from their taxes is eliminated, a change Congress could announce as soon as December.
Despite the disputed claim that the changes would affect those primarily in higher-income brackets, Congress should note: Those earning between $15,000 and $25,000 had the most negative reaction to the notion of changing retirement plans, with nearly 57% saying they would reduce savings.
In an America without widespread pension plans, this could mean millions of the nation's poorest people turning more, if not exclusively, to Social Security to pay for all of their retirement needs, even though the system is portrayed by many politicians as already facing a crisis.
Such reliance is particularly troubling for 401k advocates, because the average Social Security beneficiary gets only slightly more than $14,000 each year, hardly enough to retire comfortably on. (Will your 401k provide enough in your retirement? Find out with MSN Money's calculator.)
Attorney and CPA David White, the president and founder of David B. White Financial in Bloomfield Hills, Mich., doesn't mince words as he watches the ongoing debate.
"The ramifications are very serious and severe," he says. "I think it would be a huge mistake to do this."
Such fears that changes could reduce incentives for saving -- including making employers less inclined to promote and support the plans they do now -- are abundant, despite efforts to make the changes part of a careful strategy that seeks opportunity in crisis by looking at a long-term overhaul good for all involved.
A variety of tax incentives and strategies are at work with retirement plans, according to the American Society of Pension Professionals & Actuaries. Employer contributions to qualified retirement plans are deductible to the employer and not subject to FICA tax. Income tax on investment earnings on those contributions is deferred until distribution. In addition, people with adjusted gross income of less than $27,750 and married couples with an AGI of less than $55,500 may qualify for a Saver's Credit ranging from 10% to 50% of the first $2,000 a person contributes to an IRA or employer-sponsored defined-contribution plan.
Any and all of the current tax incentives could be eliminated or modified as part of a deficit-reduction strategy.
In his opening remarks at a Senate Finance Committee hearing on Sept. 15, Max Baucus, D-Mont., laid out concerns with the current retirement system.
"Our tax code has several key provisions that encourage Americans to save for their retirement," he said. "The tax benefits apply to pensions, Individual Retirement Accounts and employee stock ownership plans. These tax incentives add up. In total, they cost more than the tax preference for employer contributions to health insurance plans, and they cost nearly 50% more than tax expenditures on the home mortgage interest deduction. The United States has the most successful private retirement system in the world, but for the amount our country spends on retirement savings, are we getting enough bang for our buck?"
Baucus pointed out that, unlike many defined-benefit plans such as pensions, defined-contribution plans such as 401k's do not provide stipends or insurance to cover long-term care expenses.
"This means that a retiree can outlive his retirement savings whether due to inflation, market declines, unexpected health expenses or even the good fortune of living longer than expected. And many do," Baucus said. "In spite of the tremendous tax preferences for retirement savings, many Americans are left without sufficient resources to maintain a comfortable retirement."
Budget negotiators and Treasury officials have estimated that eliminating tax breaks for 401k plan contributions would pump more than $67 billion back into federal revenues in 2012 alone. That estimate is disputed and called "overstated" by the American Society of Pension Professionals & Actuaries.
The changes are merely "robbing from future tax revenues," the organization says.
"It should be stressed -- and is often forgotten in this debate -- that the tax expenditures associated with retirement savings are a deferral of taxation, not an avoidance of taxation," says Michael Falcon, the head of retirement for J.P. Morgan Asset Management, who isn't hopeful about the likely impact on savings.
"Replacing the current deferral of taxation would have an impact beyond the timing of deposits to participant accounts," Falcon says. "The fact that (employee) contributions are not subject to federal withholding (they are subject to FICA tax) means that participants can save more while seeing a smaller impact on their take-home pay. If an employee's tax withholding on $100 was $20, contributing the $100 to the plan would only cost $80 in take-home pay.
"If participant contributions were subject to taxation, this could result in lower contributions, as employees would not get the benefit of the 'withholding bonus.' This would be compounded if the employer contributions were now subject to immediate federal tax withholding and FICA," Falcon says.
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Hey tjr03, maybe you don't understand? Contributions to an employer's 401K or 403b plan are absolutely protected from creditor attachment. That means that, if in the future, you get sued or have an unexpected medical crisis, or some other crisis -- these assets are protected. If you contribute to an after tax plan, that's not necessarily true. Most are not protected at all. others are only kind-of protected, meaning you have prove the assets are "reasonably necessary for your support" to keep them. This means litigation and attorney's fees which costs money even if you ultimately win.
Also, what about the employee match? It's a nice to get free money for acting responsibly and, assuming our market doesn't tank, this free money will continue to grow over time.
I am just an middle class worker. This is one of the few retirement savings tools -- and tax savings or deferral tools -- that middle class workers can use if we are smart enough to use it. If the money doesn't get deducted directly from my paycheck, I will spend it to live today thereby robbing from my retirement and robbing from my kid's future when they get stuck supporting us.
FYI - I read though the comments and you were the first to mention PBO and the Dems have been in control for close to 6 years?
I need more info. I do like the 401K where I work as they match some funds so its a good deal. The problem is that my wages have not gone up with the cost of living in 10 years so getting by in life and adding to retirement just gets tougher and tougher. With what retirement age is for Social Security I will likely die before I can see any benefit, and I bet if I retire early without SS assistance they will find a way to make that impossible(tax). For those of us who cannot put much into savings the 401K already locks up the money making hardship withdrawals costly causing some of us to just reduce it to the minimum to obtain the company match leaving us to find other vehicles to keep some money easy to reach.
wow,,, i read some of the comments here and it would appear many are simply untrained and really do not understand how these investments work,
simply put, you are deferring tax on a fancy savings accounts or a mutual fund to withdrawal the monies at a later date. so by "investing" you are reducing your tax burden marginally with today's rate for an unknown tax rate in the future. so you really think the rate is going to go down!!! lol
just invest your money in after tax plans so when you withdrawal - first there is no age limit and second there is no tax liability. so simple - you are NOT saving any tax liabilities or amounts you will pay, you are only increasing the amount when you withdrawal.
People are blaming Obama when it is only Congress that passes the laws. Congress is filled with rich men who have a great health plan and a super pension plan that no other workers in America will ever see.
One of the problems Americans face is that Congress keeps on changing the pension and 401K rules. When Congress needs money, they change the rules.
I have been losing money on my 401K, as much as a years worth of savings in one day. I am down about one third and will soon have to start drawing out my 401K money so it can be taxed. What I though was a good and save investment turned out to be mostly losses. I did not pay taxes on what I put in but my investments are way below what I invested. Most of my various employers have quit matching a long time ago. It was assumed that I would be in a lower tax bracket when I retired and paid taxes on my 401K withdrawals but no Congress will simply find a way to tax me more. My Social Security taxable income rises when I get my 401K money so I lose doubly.
No wonder there are people protesting on Wall Street and why people have so little faith in Congress.
For those who blame Obama, remember this crap has been going on for a very long long time.
HERE Is More of the HOPE And Change we were told was coming
Thanks Obama,it is time to leave the office while there is still a USA
I could honesty give a crap less. I'll probably have to work until I die anyway since the retirement age will probably be 72 or higher by the time I can retire.
When you put your money in the 401k or any retirement plan other than specific investments you don't know how your money is specifically getting invested.
I would rather work my whole life than support companies that I don't agree with their practices and Wall Street. In my opinion the stock market is just as bad as the oil companies because the stock prices don't only reflect the company, they are too heavily influenced by speculation and external events that often shouldn't affect their value.
I'm voting with my money and not taking the 401k, or stock market for that matter, route.
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